Rupee to Depreciate Further Unless Current Account Deficit Improves

Pakistan exchange rate has been depreciating in the interbank and open market. Experts say that this trend may continue till pressure on the current account deficit eases.

Sources in the Finance Ministry said that PKR would settle at Rs 122 per dollar after reaching its peak of Rs 135 within the next few days. The rupee will stabilize at Rs 122-123 which is its fair value, but only after the prevailing uncertainty fueled by the present politically highly charged atmosphere ends, which would be after the election results are out, they contended.

A well known economist, speaking over the condition of anonymity, said that the rupee may continue to depreciate till it reaches Rs 140 to the dollar as the currency’s erosion is a symptom of the historically high current account deficit facing the country today.

He added that in fiscal year 2007-08 the current account deficit rose to 9 percent of GDP which, in turn, compelled the PPP administration to take a bailout package from the International Monetary Fund (IMF) for balance of payment support and devalue the rupee against the dollar by 33 percent – from Rs 61 to Rs 80 per dollar.

He pointed out that the situation today is worse and the current account deficit has reached its historical highest level at $18 billion on 2017-18 and therefore the rupee is unlikely to stabilize below Rs 140 per dollar.

He further added that other major reasons for the depreciation, besides high current account deficit, is that the rupee was kept unnaturally overvalued during the last five years. He suggested three ways to deal with the situation:

cash margins must be imposed across the board by 30 per cent;

cash provided to exporters against incentives through commercial banks;

deal with under-invoicing from China by reducing import duty.

Former Finance Minister Dr Salman Shah said that the rupee will stabilize after touching Rs 135 as exports are indicating some improvement. However he added that the situation would become clear after imports and exports figures are released by the State Bank of Pakistan (SBP).

He said the major reasons behind the rupee depreciation are acquiring unsustainable loans, approaching repayments, contraction in exports during the last few years and phenomenal increase in imports that led to widening of the trade deficit and balance of payment problems.

If reserves are low and unable to absorb the pressure, local currency starts to depreciate and unless measures are taken to increase exports and reduce imports, rupee erosion would continue, he added.

Dr Ashfaque Hassan Khan said that rupee depreciation is the result of flawed policies of the PML-N administration, which are being pursued by the caretakers as well. He said that former finance minister Ishaq Dar kept the exchange rate artificially overvalued for four years by injecting $10 billion into the market.

Khan added that it is hard to assess what value the rupee would stabilize at but concluded that what is happening will have serious ramifications on the economy.